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Tuesday, May 24, 2011 5:09 PM

Chinese Rating Agency Downgrades UK Sovereign Debt; Downgrade Party Needed

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The Wall Street Journal, the Telegraph, and International Business Times have stories regarding a downgrade of UK sovereign debt by a Chinese rating company. Much of the information overlaps, but some snips vary site-by-site.

Wall Street Journal: China Ratings Agency Downgrades UK Sovereign Credit Ratings

Chinese ratings provider Dagong Global Credit Rating Co. said Tuesday it downgraded the local and foreign currency sovereign credit rating of the U.K. from AA- to A+ with a negative outlook.

"The downgrade reflects the true status of the deteriorating debt repayment capability of the U.K. and the difficulty in improving its sovereign credit level in a moderately long term in the future," Dagong said in a statement.

"Considering that the uncertainty arising from (future) monetary policy adjustments of the Bank of England and the spillover effect of the European countries...are likely to further worsen the government's fiscal status, Dagong gives the negative outlook on the local and foreign currency sovereign credit rating of the U.K. (for the next) one to two years," Dagong said.

Dagong said the data indicate a deterioration in the U.K.'s ability to service its debt, while global inflation triggered by excessive issuance of the U.S. dollar will also affect growth.

The U.K.'s debt burden leaves it little room to use monetary and fiscal policies to boost domestic demand and stimulate its economy, and its deficit will remain a high level, Dagong said, without giving a time frame.

The U.K.'s banking system has a large amount of risk exposure, which could create risks for the government, Dagong said, adding it estimates that about 40% of the banking system's GBP2 trillion worth of assets is exposed to risk.
The Telegraph: Chinese rating agency downgrades UK debt
Dagong Global Credit Rating Company downgraded the UK's local and foreign currency sovereign credit rating to A+ from AA- with a "negative" outlook for its solvency, the company said in a statement.

The downgrade reflected "the deteriorating debt repayment capability of the UK and the difficulty in improving its sovereign credit level in a moderately long term in the future," it said.

Uncertainties arising from the Bank of England's future monetary policy and the impact of debt-laden European countries on the British financial system are "likely to further worsen the government's fiscal status", it said.

Dagong has made a name for itself by hitting out at its Western rivals - Moody's, Fitch and Standard & Poor's - saying the big three caused the financial crisis by failing to properly disclose risk.

Britain's deficit for the 2010-2011 financial year fell from almost €162bn (£141bn) the previous year to just below €147bn, after a swathe of cuts ordered by Prime Minister David Cameron.

That meant the deficit was logged at 10pc of national output, down from 11.5pc 12 months earlier.

It is the third-highest in the European Union after that of Ireland and Greece - higher than either Spain or Portugal, next in line at just above 9pc each.

Britain's cumulative national debt, however, rose by almost 20pc year-on-year to more than €1.2 trillion - and now accounts for 82.5pc of GDP.
International Business Times: UK credit rating downgraded by Chinese rating agency
Dagong sees relatively low growth and high inflation. This is simply another institution pointing out the new global phenomenon, Stagflation.

It also stated that because of the slow growth, the budget deficit would still overshoot the government's 7.9% to 9% target.
Downgrade Party Needed

Ironically, Iceland deserves an upgrade for telling the EU where to shove it, thereby getting its fiscal house back on the right track. Nearly every other country deserves a downgrade.

Let's have a downgrade party.

We may as well downgrade some states too. In case you missed it, the Illinois Treasurer Warns Against Lending to Illinois

Mike "Mish" Shedlock
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